KEY POINTS:
When is a profit not a profit? The answer would seem simple - when it's a loss.
But figures emerging from this year's result's season show that determining whether a company has made a profit, how much of a profit or even whether the net profit should be
considered at all is not that simple.
Now, half-way into the reporting season, there are examples of grey areas in what a company includes in its bottom line and how far some will go to turn a negative into a positive.
One of the first this season was new company New Zealand Farming Systems Uruguay - a spin-off of rural services provider PGG Wrightson.
It reported a net profit after tax of US$1.6 million ($2.2 million).
But that was before it took into account a performance fee which it must pay on an annual basis to its manager and key shareholder PGG Wrightson. That fee was US$13.6 million - effectively giving the company a net loss of US$12 million - but the loss was never spelled out in its commentary.
It was a move that irked former shareholder and Northland Port chairman Mike Daniel.
"It instils an expectation from less-experienced investors that the profit from operations is going to be available for shareholders.
"But that is a huge inaccuracy. It's really misleading."
Forsyth Barr analyst John Cairns says it was clear there was a loss at the operating level and that was compounded by the performance fee.
"If you read the release properly it is quite clearly stated - it can't be any clearer."
Cairns says the way companies report their results doesn't change in tougher times, because they have to follow a set formula, but admits they tend to accentuate the positives more in the way they present the information.
"That's just to be expected - it's nothing untoward."
Another example came this week with the results of listed property fund AMP New Zealand Office Trust. It declared a 47 per cent drop in after-tax profit - down from $225 million last year to $118 million this year - based on a dive in property valuations.
But its chief executive, Rob Lang, called on shareholders to focus on the company's distributable profit rather than its bottom line.
"We don't think it's a relevant number for investors because it involves non-cash items," he said at the time.
He was backed by ABN Amro Craigs research head Mark Lister.
Lister says there are some companies where it's just not appropriate to focus on the bottom line.
"One that comes to mind was one of the property companies the other day [AMP Office Trust]. The actual bottom-line net profit number includes property revaluations, and the revaluations for the 2007 year were very, very high because we were in such a strong property market, and the ones for 2008 were more modest.
"In our view it's just not appropriate to include those revaluation gains when that's just a function of the cyclical property market movements."
But Lister says when there are some additional costs that are actually going to have to be paid in cash it makes sense to include them in the bottom line and for investors to pay attention to them.
"We've seen in the banking sector in Australia recently a lot of the companies add additional provisioning for bad debts.
"In a situation like that you wouldn't want to quote the profit result but exclude those. Those are non-cash write-downs because they're provisioning for future expected losses."
While it's not good news that future defaults are expected, at least the banks are admitting to it and getting prepared.
But even the banks are not perfect when it comes to being completely frank about their balance sheets.
ASB Bank, which last week released its June year result of a net profit of $515 million, down 3.2 per cent on the previous year, has refused to declare how much of a one-off gain it made from the Visa IPO last year.
While fellow bank ANZ National was happy to declare its gain, ASB has come up with no explanation for its decision - a move which makes it harder for investors and analysts to compare the bank with its rivals.
Lister says there is a risk less sophisticated investors will not get the full story, but that's why analysts have a role to play. "Less sophisticated investors might only notice that initial headline ... I suppose there's a risk that people don't get the full story. But that's why people have advisers such as ourselves."
But Daniel believes misleading reporting is not isolated to a few companies.
He cites the case of community-owned asset Northpower which this year bought power assets in Perth.
He says a net profit of $11.78 million was reported - but for its New Zealand business it made a profit of more than $14 million.
"Does that mean they lost nearly $3 million in Perth? It's all in the words. It's more about what they are not saying. But if you are a community-based farmer you wouldn't have a chance of understanding it."
He blames part of the issue on changes made by the stock exchange.
He says the exchange used to send out a whole lot of forms that companies had to fill out and those forms were then posted on the NZX.
"Now you have the added option you can write a commentary. As long as it is part of the annual result that can go up on the site and become a market release.
"When it was just the form people were restricted but now they have a bit of a license to choose words."
NZX regulation business manager Garth Stanish says the NZX changed the requirements for company reporting in 2006 because the old forms were seen as being too prescriptive and companies complained it added to compliance costs.
When it changed the format it brought in the new listing rules as well as a requirement for a commentary on the financials.
"The view was that it was good to have a commentary because that provided a simple summary without people having to go through the financial figures. It's designed to be friendly to users."
Stanish says the rules are a reasonably prescriptive list but as long as the rules are met it is up to companies how they present the information.
"The NZX doesn't have any best-practice guidelines, it gives companies the freedom to meet requirements as they see fit. As long as they fill the requirements of the listing rules that is all they have to do."
Stanish, who has been at the NZX for only about five months, says he hasn't seen many rule breakers in his time. But he couldn't give figures or talk about specific cases.
As to investors, he says they get the odd complaint about company reports but it is not common. "It's all pretty normal financial information."
Shareholders Association chief executive Kevin McCaffrey says disclosure has improved for listed companies since the new regime came in but those not listed can still be very poor.
"You would have to say finance companies haven't done a very good job."
He says all shareholders want is for boards and management to be full and frank about the company's situation.
"If times are hard, disclose it and dish it out fully. That applies at all times - but with this environment, now is the time when shareholders really need some confidence.
"We want transparency and we want directors to front up."
For those who don't front up with the facts it can be a fast track to shareholder mistrust.
"Really the issue is that directors and management are putting their credibility on the line. There are enough smart analysts and media out there to see through the cover-ups."
But that doesn't make it any easier for the average shareholder to understand annual reports. He says it's up to shareholders to also educate themselves.
"Really if they want to understand them they have to take some time to come up to speed themselves. It's achievable. Otherwise we do really rely on analysts and advisers."
KNOW YOUR JARGON
Revenue
The amount of money that is brought in to a company by its business activities - the "top line" or "gross income" figure.
Ebitda
Earnings before interest, tax, depreciation and amortisation. Ebitda is revenue minus the costs of running the business.
Operating cash flow
The cash generated from the operations of a company, minus tax, interest and costs.
Investing cash flow
What the company spends on things such as property, plant and equipment.
Finance cash flow
How much the company has borrowed.
Net profit after tax
The money a business makes after accounting for all of the expenses.
Dividend
A distribution of a portion of a company's earnings to its shareholders, decided by the board of directors. Usually quoted in the amount each share receives.
Earnings per share
Net profit after tax divided by the number of shares in the company.
Shareholders' equity
A firm's total assets minus its total liabilities. Also known as "share capital". It comes from two sources - the original money invested in the company, and earnings the company retains.
Balance sheet
The financial statement that summarises the company's assets, liabilities and shareholders' equity at a specific point in time. Cash, inventory and property are on the asset side, while accounts payable and long-term debt are on the liability side. The two sides balance out - the company has to pay for the things it has (assets) by either borrowing money (liabilities) or getting it from shareholders (shareholders' equity).
Profit and loss statement
Summarises the revenues, costs and expenses the company incurred. Shows the ability of the company to generate profit by increasing revenue and reducing costs.
